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Franklin Templeton Plans Short Bond Fund

By

Cinthia Murphy

February 19, 2013

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The mutual fund giant looks to debut in the ETF market with a short-duration active bond fund.

Franklin Templeton, the San Mateo, Calif.-based mutual fund firm, filed paperwork with U.S. regulators to market its very first ETF, an actively managed fixed-income strategy that’s designed to cater to investors’ appetite for income.

The Franklin Short Duration Government ETF will own primarily U.S.-issued debt such as Treasurys and mortgage-backed securities, including adjustable-rate mortgage securities. The fund, which is expected to have an average duration of three years or less, might also own some inflation-linked debt.

Franklin Templeton first requested permission to enter the ETF market with an exemptive relief filing last June, joining other big mutual fund firms such as Alliance Bernstein, Janus, Eaton Vance and Dreyfus in their quest to stake a claim to the booming ETF market.

The firm’s first ETF would join a roster of debt funds that look to serve up shorter-duration bond portfolios as a way to access income while mitigating the risks associated with interest rate changes. Other providers, such as State Street Global Advisors, iShares and AdvisorShares, have also been racing to tap into investors’ demand for income-generating strategies through shorter-duration portfolios.

Indeed, duration is a measure of just how sensitive a debt security is to fluctuations in interest rates—the shorter the duration, the less sensitive a security is to rate changes. That trait has made such shorter bond funds resonate with investors who are looking for rates to eventually rise from their near-zero levels.

“Duration differs from maturity in that it considers a security’s yield, coupon payments, principal payments, call features and coupon adjustments in addition to the amount of time until the security finally matures,” the company said in the filing.

“In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest rate changes than a portfolio with a higher duration,” it said.

This ETF will invest exclusively in debt instruments from the U.S. government, its agencies or instrumentalists such as Ginnie Mae, Fannie Mae and Freddie Mac, the filing said.

“Because the fund can only distribute what it earns, the fund’s distributions to shareholders may decline when prevailing interest rates fall or when the fund experiences defaults on debt securities it holds,” the company said in the prospectus.